Why Microsoft Announced a Cheaper Xbox One Without Kinect

The company responded to consumer complaints and is offering a cheaper version of its console without the motion sensor.

May 15, 2014 at 11:27AM

When Microsoft's (NASDAQ:MSFT) Xbox One and Sony's (NYSE:SNE) PlayStation 4 were released last fall the most glaring difference between the two units was the price -- Xbox One came in at $499 while PS4 cost $399. Microsoft justified its higher price through the inclusion of its Kinect motion sensor controller, which costs $99 when sold separately for use with the previous generation Xbox 360.

Kinect allows users to play games where the device tracks your physical movement. It also serves as a way to control Xbox One through voice commands and hand gestures -- features that Microsoft touted heavily during the introductory media event for the new console.

Those features reportedly don't work as fluidly as advertised and many adults (and kids too) prefer playing games with a controller while seated.

The shortcomings in functionality and the higher price tag because of Kinect can't be entirely to blamed for the Xbox One's lagging sales in comparison to the PS4, but they were clearly factors.

To answer those complaints and level the playing field, Microsoft will now be offering a version of Xbox One without Kinect for $399. The company will also be making another change likely designed to put it in on more even footing with its competitor: the company will no longer require customers to pay at least $60 a year for an Xbox Live Gold memberships to access apps including Netflix (NASDAQ: NFLX) and Hulu.

These aren't moves Microsoft wanted to make, but they clearly needed to happen if the company was going to keep the race with Sony competitive.

Why Microsoft did it?

In the article Xbox One vs PS4: Is The Console War Already Over?, I wrote about research from IDC that predicts that PS4 will have sold 51 million units globally by 2016. The report forecasts that Microsoft will take the lead in North America and be a closer competitor globally only if it unbundles Kinect. 

Clearly Microsoft read that report (or has its own similar research) and understands that while the company may believe strongly in Kinect, consumers don't enjoy being forced to buy what they perceive as an expensive add-on -- especially when Sony offers a comparable console for a lower price.

Microsoft framed its decision in a blog post as "delivering more choices," which is nicer than saying "we tried really hard to cram Kinect down your throats but you weren't buying." The company also acknowledged that public feedback played a part in its decision.

Since the beginning, we have focused on delivering great games and entertainment experiences for you. Your feedback matters to us and it shapes the products and services we build.... Today, we're excited to share more ways your feedback is impacting the products we build...

This may have been a tough choice for Microsoft, but it's a sensible one. There was no real financial logic to bundling Kinect with Xbox One if the peripheral is not serving as a differentiator that wins sales from Sony.

Making apps free is a bigger deal

Microsoft's promotion of both Xbox One and the previous generation Xbox 360 make it clear you can use apps like Netflix and Hulu through the console. What is made less clear is that until this recent announcement you needed a paid subscription to Xbox Live to access those apps.

Basically you had to pay to access services you are already paying for and you find out about it after it's too late to decide against buying an Xbox. That's a clever (albeit devious) strategy that has likely led many a casual gamer to be forced into an Xbox Live subscription in order to fully use the console. 

The company explained the move in the same blog post: 

Coming in June, anyone with an Xbox will be able to access popular entertainment experiences – whether or not you have an Xbox Live Gold membership. This includes great gaming apps like Machinima, Twitch and Upload, popular video services like Netflix, Univision Deportes, GoPro, Red Bull TV and HBO GO, sports experiences like the NFL app for Xbox One, MLB.TV, NBA Game Time, NHL Game Center and more. Microsoft experiences including Internet Explorer, Skype, OneDrive and OneGuide will also be available to all Xbox customers.

Microsoft does not regularly release subscriber figures but in February 2013, the company said Xbox Live members now number 46 million, up 15% from a year ago, GeekWire reported. It's also impossible to know what percentage of members will stay members for the gaming benefits, but it's fair to assume that in dropping the mandatory subscription the company is giving up some revenue. It's also adding a revenue opportunity because all its Xbox users will have the opportunity to access dozens of streaming pay services and if the customers are not already members and sign up through Xbox, Microsoft gets a cut on a recurring basis.

This is a bold move

Since Satya Nadella took over for Steve Ballmer as CEO, Microsoft has been far more willing to listen to consumers and change course. The company is making radical changes to Windows 8 including restoring popular features that had been removed. It also finally brought Office to iPad and now it's changing and adapting its Xbox strategy.

Making these moves with Xbox quickly and decisively should reignite interest in the platform and many of those customer will likely eventually buy a Kinect when a feature or game requiring it makes it seem like a must-have item. Quick actions like this that solve problems and answer complaints shows that Microsoft knows it's no longer the dominant force that can dictate to customers how the game will be played. Having learned that lesson, there is no reason Xbox One -- in its various versions -- won't draw even with and eventually surpass PS4. 

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Daniel Kline is long Microsoft. He is leaning toward buying an Xbox One. The Motley Fool recommends Netflix. The Motley Fool owns shares of Microsoft and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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